Further Drop for Aussie Would Help Economy, RBA Official Says

The Australian dollar could fall further, which would help the country’s resource-rich economy recover from a slowdown caused by a fall in mining investment, a senior central bank official said Friday.

Despite a sharp decline last year, Australia’s currency remains stronger than its historical average despite fundamental influences that could drive it lower, such as record-low interest rates, lower commodity prices and the slowdown in mining investment.

“This suggests that a correction in the exchange rate might be in prospect,” Christopher Kent, assistant governor at the Reserve Bank of Australia, said in a speech to the Committee for Economic Development of Australia, a national business group. There are “good reasons to think that the Australian dollar has for the past couple of years been on the high side of fundamentals,” he said.

After setting a record high at US$1.1081 in July 2011, the Australian dollar fell about 15% from April 2013 to a three-and-a-half year low of US$0.8860 last month. It rose to US$0.9069 this month after Australia’s inflation rate jumped and the Reserve Bank of Australia adopted a neutral stance toward monetary policy.

At its February board meeting, the central bank dropped its previous reference to the Australian dollar as being “uncomfortably high,” saying the most prudent course is likely to be “a period of stability in interest rates.”

Mr. Kent said Friday that it was surprising the Australian dollar didn’t fall much until last year, given a decline in Australia’s export prices relative to import prices that began in late 2011. The Aussie, as the currency is known, was also weighed down by falling returns on capital after the mining-investment boom peaked in 2013, resulting in weaker demand for the currency for investment in Australia.

“The bank has noted for some time that lower levels of the exchange rate, if sustained, will assist in achieving balanced growth in the economy and bring about a quicker return to trend growth,” Mr. Kent said.

He downplayed the risk of inflation, saying the Aussie’s fall since November meant inflation will be “somewhat higher than we’d thought,” but still consistent with the inflation target of zero to 2 percent.